February 10, 2004  Email this  Print this
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In Search of Safe, Cheap Stocks
by Steven Goldberg  Curtis Jensen, manager of Third Avenue Small-Cap Value, says he spends as little time as possible guessing what will happen next with the stock market, interest rates, the economy or the dollar. Instead, he focuses on buying the best stocks he can find at the lowest price.
His approach is working. Third Avenue Small-Cap Value (TASCX) has beaten its peers four of the past six years. It's also ahead of the benchmark Russell 2000 by an annualized 5.5 percentage points over the last five years.
A word of warning, though, Jensen has been running the fund only six years, and his record, while good, isn't outstanding. Then again, the fund is also less volatile than its peers and the Russell index. Indeed, with most of the best small-cap value funds closed to new investors, this fund may be the best on the market for new investors.
Safe and cheap
"Safe and cheap" is the mantra of his mentor, Marty Whitman, 78, one of the most renowned value managers of our time. It's Jensen's, too.
Safety, says Jensen, 41, comes from "a fortress-like balance sheet, which acts as a cushion when times get tough." It also means trying to identify management teams with proven track records of success -- an endeavor Jensen calls "the hardest thing we do here."
What's more, like Warren Buffett, Jensen won't buy stock in a company he doesn't understand. "We need to be able to understand the business model and the accounting," he says.
Cheap means buying a stock at a discount of at least 30% to what "a reasonable and knowledgeable businessman would pay for the entire business. Ideally, we want a 50% discount."
The fund often buys stocks that have assets that aren't fully valued on the firm's books.
A long-term view
Jensen puts little energy into forecasting next year's earnings, much less next quarter's. "We're focused on determining the long-term earnings power of the business."
He does that by averaging earnings over the previous business cycle. He then takes those "normalized earnings" and tries to figure out what's changed with the business, what's different now.
Jensen is slow to sell. "We're long-term, patient investors. We know companies go through difficult times." Jensen also tends to hold onto stocks even after they've risen a ton in an effort to make the fund more tax efficient. Turnover in the fund averages only about 20% annually.
Nor is he afraid to hold cash. With fewer attractive stocks available than a year ago, he's let cash build to 20% of assets.
Despite the stock-by-stock approach, Jensen's current portfolio is tailor-made to thrive in a continuing economic recovery. Some 30% of his holdings are industrial materials or energy stocks, and more than a quarter are technology hardware stocks. Another 30% are in financials.
What he likes now
Here are some of Jensen's favorite stocks, along with his views on them.
CommScope (CTV) is the largest manufacturer of coaxial cable, used mainly by cable television companies. This business is quite profitable. It also owns, in a joint venture with a Japanese company, a large maker of fiber optics. While the joint venture is generating huge losses, most are mere accounting write-downs. Overall, the company is losing money, but the firm's earning power is masked by its bookkeeping losses.
Cross Country Healthcare (CCRN) is one of the two largest providers of temporary nurses. With a nationwide shortage of nurses, CCRN offers nurses 13- to 26-week assignments. It provides competitive pay and housing. The business is a great one because it requires little capital and few permanent employees. "It's a logistics business, and it's about keeping nurses happy." It trades a 1.8 times book value. The P/E is 23 based on consensus estimates of 80 cents per share earnings this year. But earnings have been depressed because nurses had been reluctant to part with full-time jobs during the economic slowdown. The fund also owns AMN Healthcare (AHS), CCRN's chief competitor, but it's a little pricier.
St. Joe Company (JOE) owns nearly 3% of all the land in Florida, almost all of it in the northwest and panhandle of the state. Most of the acreage is carried on the firm's books at huge discounts to its true market value. Management is skilled and has big financial incentives to get the stock price up by developing the land. "But anyone looking to make a quick buck will be a disappointed. This is a long-term process."
Willbros Group (WG) is an engineering and construction firm that works mainly on gas pipelines, here and abroad. It stands to benefit from rising demand for natural gas. It has little debt and sells at just 1.3 times book value. Earnings have been rotten, but they should turn around with demand.
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